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UBS Investment Research
Aspen Pharmacare Holdings
Big challenge ahead
„ Difficult task of turning a business around with macro risks
We have factored in the Sigma Pharmaceuticals acquisition, but believe that Aspen
faces a difficult task improving this division in a tough environment. The main
issues are: 1) government-imposed price cuts; 2) rising generics and OTC
competition from imported drugs; 3) lower pipeline growth as Pfizer releases its
own generics; 4) OTC competition from grocery house brands; 5) low growth in
medical and manufacturing.
„ Generics margin: 6% in FY 15E versus a negative margin in FY 11E
The Generics division posted a 4% EBIT margin in FY 10 (ended 31 January
2010), but the margin could be negative in FY 11. We believe that Aspen can
improve EBIT margins by cutting raw material prices by 20% in FY 12E and
FY 13E, to offset government-imposed price cuts of 10% over the same period.
However, at best the division’s margin only rises to 6% in FY 15E, improving
Sigma’s margin to 18% (from 13% in FY 11E). We estimate Sigma to contribute
4% to Group HEPS in FY 12 and 5% in FY 13.
„ Lower raw material prices cannot fully offset government price cuts
Earnings are highly sensitive to government price cuts, as a 20% cut results in a
10% EBIT margin in FY 12E. Therefore, Aspen has to decrease Sigma’s raw
material prices by an unlikely 40% to keep the division’s margin at 14%. We also
estimate that pipeline growth from Aspen’s SA drugs into Australia unlikely to be
sufficient to mitigate this risk.
„ Valuation: Maintain Sell rating; deal lifts price target to R83 (+4%)
We use a DCF sum-of-the-parts (SOTP) to value Sigma at R3ps. We thus increase
our Aspen price target to R83.0. Our price target implies a one-year forward PE of
15x. The stock currently trades at 16x on five-year HEPS CAGR of 11%
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Aspen Pharmacare Holdings
Big challenge ahead
„ Difficult task of turning a business around with macro risks
We have factored in the Sigma Pharmaceuticals acquisition, but believe that Aspen
faces a difficult task improving this division in a tough environment. The main
issues are: 1) government-imposed price cuts; 2) rising generics and OTC
competition from imported drugs; 3) lower pipeline growth as Pfizer releases its
own generics; 4) OTC competition from grocery house brands; 5) low growth in
medical and manufacturing.
„ Generics margin: 6% in FY 15E versus a negative margin in FY 11E
The Generics division posted a 4% EBIT margin in FY 10 (ended 31 January
2010), but the margin could be negative in FY 11. We believe that Aspen can
improve EBIT margins by cutting raw material prices by 20% in FY 12E and
FY 13E, to offset government-imposed price cuts of 10% over the same period.
However, at best the division’s margin only rises to 6% in FY 15E, improving
Sigma’s margin to 18% (from 13% in FY 11E). We estimate Sigma to contribute
4% to Group HEPS in FY 12 and 5% in FY 13.
„ Lower raw material prices cannot fully offset government price cuts
Earnings are highly sensitive to government price cuts, as a 20% cut results in a
10% EBIT margin in FY 12E. Therefore, Aspen has to decrease Sigma’s raw
material prices by an unlikely 40% to keep the division’s margin at 14%. We also
estimate that pipeline growth from Aspen’s SA drugs into Australia unlikely to be
sufficient to mitigate this risk.
„ Valuation: Maintain Sell rating; deal lifts price target to R83 (+4%)
We use a DCF sum-of-the-parts (SOTP) to value Sigma at R3ps. We thus increase
our Aspen price target to R83.0. Our price target implies a one-year forward PE of
15x. The stock currently trades at 16x on five-year HEPS CAGR of 11%
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